The past action of the ECB suggests that the central bank may not act sufficiently proactively in these instances. Even though the ECB emphasised the flexibility of the PEPP, in practice the deviations from the capital key were quite limited also in the early stages of PEPP purchases, when the market pressure was at the highest. Subsequently, government bond markets did not calm down for good, until the discussion about an EU-level recovery fund started in earnest, resulting eventually in the NextGenerationEU. The ECB has a lot of means at its disposal, but since none of them are uncontroversial, there may be more unwillingness for their full use.
In conclusion, we think there will be more volatility in government bond markets going forward and see Italian bond yields head higher again before long, which will add pressure on the ECB for more forceful interventions.However, we do not think they will compromise on their plans on hiking rates because of pressure on countries like Italy. We do not think that the worries towards Italy will prevent longer bond yields from rising further, but they will still be a drag on the EUR. - Nordea Research
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